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Guest Editorial: Short selling explained

By Dr. Sherwood Burr

Welcome to the exciting world of short selling! It’s a topic that my colleagues and I at the Brookings Institute (a facility I co-founded in Brookings, South Dakota where men who are afraid of sharp objects can discover the joys of logging) talk about all the time.

Let me explain how it works. Let’s say you own a duplex and you rent out one side to help pay down your mortgage. He agrees to pay $1,000 a month but then you say you’ll knock it down to $900 if he mows the lawn in the summer and shovels the snow in the winter. The first couple months go OK but then he starts to fall behind, and he’s a nice guy and you enjoy talking to him even though the glass eye he wears as a necklace is a little distracting.

Then he offers to do twice the lawn mowing if you’ll knock it down to $800 a month and you explain that mowing twice as often doesn’t really do you any good, and then he says his hours at the plant have been cut back but eventually you learn that the plant is the mulberry bush out back and worse yet, he’s really just a volunteer. And then you’re like, “Listen, Rick (Did I mention his name is Rick? It doesn’t matter since this is a hypothetical, but it’s definitely Rick) you owe me for two months’ rent and we decided to go halfies on that portable sauna and you never paid me, and every time I try to use it you’re in there with your book club, all naked, talking about how good “The Goldfinch” was.”

So then Rick decides he’ll make some money by selling fur hats he makes out of the badgers he traps (he doesn’t kill them, but he does shave them in a rather undignified way) at his Etsy store, but before he can sell any a huge guy wearing an eye patch comes busting through the door shouting, “I told you I’d track you down you son of a bitch!” Rick runs away never to be seen again.

Short selling is nothing like that. Here’s how it really works. If you think a stock is likely to decline in value you borrow it from a broker with the promise that you’ll give the broker back the stock later. You sell the stock at the current price, then it drops, and you buy it back.

How do you borrow a stock from a broker? Well all it takes is a little persuasion. You need to butter up the broker by saying things like, “My, those are some gorgeous bonds you have” and “I stopped by your mother’s house the other day. Don’t worry, I didn’t steal her heart medication and replace it with ecstasy…this time.” After that, you should have all the stocks you need.

Figuring out which stocks are going to drop in price is tricky. A good way is to call a member of Congress, say one you run into while hunting woolly mammoths at the secret prehistoric game preserve that only the well connected know about. Another is to search for advice online. One of my favorite sites is:

Ask for Gregor. He’ll let you borrow as much stock as you need, for free, if you sing “I’m a Little Teapot” while topless.

But you should be warned: If you borrow too much from a broker, he could lose so much money that he’ll be fired by his firm. And then he’ll be like, “I can’t afford my house anymore, can I move in with you? My name’s Rick.”

And then you agree since you feel bad. “Sure, Rick, you can live with me. But I gotta ask about that glass eye.”

And he looks confused, then laughs.

“OH, yes, glass. Of course. It’s not real at all.”

Dr. Sherwood Burr got his PhD at Princeton when he stole one off the wall of an unlocked office. He still claims it his, even though he clearly crossed out the name “Leona Rivera” and wrote in his own in hastily learned cursive.


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